NPC PRESS BRIEFING ON CHINA'S ECONOMY BY PBOC,

UNCLAS SECTION 01 OF 04 BEIJING 000589

SENSITIVE
SIPDIS

STATE FOR E, EAP, EAP/CM
TREASURY FOR OASIA/DOHNER/WINSHIP
NSC FOR LOI

E.O. 12958: N/A
TAGS: ECON EFIN PGOV PREL CH HK TW
SUBJECT: NPC PRESS BRIEFING ON CHINA'S ECONOMY BY PBOC,
NDRC, MOF HEADS

REF: A. BEIJING 0580

B. BEIJING 0559

C. BEIJING 0531


1. (SBU) Summary. At a March 6 press conference held in
conjunction with the ongoing National People's Congress
annual meeting (refs),People's Bank of China (PBOC) Governor
Zhou Xiaochuan, Minister of Finance (MOF) Xie Xuren, and
National Development and Reform Commission (NDRC) Chairman
Zhang Ping addressed the following issues:

-- Macro-economy: The primary objective is to ensure steady
and relatively fast GDP growth by boosting domestic demand,
reinvigorating industries, and improving social welfare.
Some economic indicators are beginning to show signs of
recovery.

-- Budget: 2009 central government spending on health,
education, social security, housing, and other social welfare
categories will increase 29 percent to RMB 728.5 billion (USD
106 billion).

-- Fiscal Policy: Increased government spending, tax reform,
and other initiatives, together with falling revenue, will
produce a 2009 fiscal deficit of RMB 950 billion (three
percent of GDP).

-- Fiscal Stimulus: The RMB four trillion (USD 585 billion)
fiscal stimulus, funded by the central government (RMB 1.18
trillion) as well as local governments and non-government
sources, will focus on improving people's livelihood.
Inspection agencies will monitor project implementation
closely to avoid duplication, inefficiency, and waste. It is
too soon to tell if more stimulus will be needed.

-- Monetary Policy: The State Council at an early point
determined that China's policy responses to the global
financial crisis should be front-loaded and forceful. Money
supply targets are guidelines rather than strict limits.

-- SMEs: Lending to small and medium-sized enterprises has
increased, but many continue to have difficulty obtaining
credit.

-- Exchange Rate: The government's goal is to maintain a
stable and balanced equilibrium, and "no further explanation
is necessary."

-- Hong Kong: The RMB settlement pilot project is proceeding,
and the currency swap plan was announced to boost confidence
on both sides of the border.

-- Taiwan: Both sides of the Strait would benefit from
greater opening in the banking sectors. End Summary.


2. (SBU) The March 6 tripartite press conference, with a
theme of "meeting the global financial crisis, maintaining
steady and relatively rapid economic growth," was one of a
number of such events offered to the media and diplomats
during the March 5-13 NPC session. Of the twelve journalists
chosen to raise questions, about half represented Hong Kong,
Taiwan, or foreign media organizations. Unlike the March 4
NPC preview briefing (ref b),however, some if not most of
the questions appeared not to be planted, as the ministers
sometimes replied without reference to their briefing
materials and appeared nervous at times.

Macro-economy: Has China Hit Bottom?
--------------

3. (U) In response to a question from an "Economic Daily"
reporter of whether the Chinese economy has "hit bottom,"
NDRC Chairman Zhang said dealing with the global crisis was
the greatest challenge of this century for China. The
primary objective is to ensure steady and relatively fast
(i.e., eight percent) GDP growth by boosting domestic demand,
reinvigorating industries, improving social welfare and
security to ease concerns and increase public confidence, and
mobilizing international support. The central government had
identified the problems early and responded swiftly, while
some other (unnamed) countries had been slow and late. Zhang
said some economic indicators are beginning to show signs of
recovery, and China's long-term strong economic fundamentals
remain unchanged.

Budget: From the People, For the People

BEIJING 00000589 002 OF 004


--------------

4. (U) Asked by a Chinese reporter what measures his ministry
was taking to improve people's livelihood, MOF Minister Xie
observed that public finance is taken from the people, so it
should be used in their interests. He said 2009 central
government spending in various public welfare categories
would total RMB 728.5 billion (USD 106 billion),an increase
of RMB 165.3 billion (29.4 percent) compared to 2008.
Spending for education, health and medical care, social
security, employment, housing, and culture all would register
double-digit increases, much of it directed to lower income
people, retirees, and rural residents.

Proactive Fiscal Policy
--------------

5. (U) In response to a query from the Xinhua News Service
about the government's "proactive" fiscal policy, Minister
Xie said this policy -- applied in conjunction with moderate
easing of monetary policy -- includes increased government
spending in selected areas, tax reform and reductions to
encourage consumption, income support for low-income people,
improvements in the social safety net, and commitment of more
resources to science and technology, energy conservation, and
environmental improvement. By reducing tax revenue and
raising spending, these measures will increase the fiscal
deficit to RMB 950 billion (about three percent of GDP),
requiring the government to issue more bonds, which Xie said
was a necessary and affordable step.

Fiscal Stimulus: Is There Enough Money?
--------------

6. (U) Asked by a Russian journalist whether the government
would have any difficulty raising enough funds for the
stimulus projects, and whether provincial leaders were
lobbying or competing for funding, Chairman Zhang
distinguished between the RMB 1.18 trillion provided by the
central government and the roughly RMB three trillion from
local and non-government sources. Projects that are
primarily for public benefit, such as schools, health care,
and water, will be funded mainly by the central government,
while semi-public-benefit and primarily commercial-benefit
projects will need to attract more non-governmental funding.
Central authorities will support and assist local governments
through issuance of RMB 200 billion of treasury bonds on
their behalf, and by providing some low-interest,
policy-based loans. Also, implementing agencies for some
projects that will generate profits in the long term, such as
power plants and roads, will be permitted to issue corporate
bonds to meet short-term capital needs; about 45 such bonds
worth RMB 170 billion have been issued since the fourth
quarter of last year, with another 50 bonds valued at RMB 150
billion pending.


7. (U) Asked how the government selected projects for
inclusion in the fiscal stimulus program, and what measures
would be taken to prevent waste and avoid duplication, NDRC
Chairman Zhang said increasing investment was the most
effective and direct means to boost domestic demand. The
central government, however, clearly has focused the program
on investments to improve people's livelihood, such as
education, housing, health, agriculture, infrastructure,
energy conservation, and pollution reduction, and not on
expansion of manufacturing industries already suffering from
excess capacity. Approximately three trillion RMB will be
used in these sectors, with the remaining one trillion
devoted to post-disaster reconstruction. Zhang said the
government will continue to adjust the program and transfer
funds between sectors as needed. Also, some parts of the
separate "ten industrial sector revitalization plans" may be
incorporated into the four trillion stimulus package.


8. (U) To avoid duplication, inefficiency, and waste, Zhang
said the government has formulated a "one clear and two
stricts" policy: clearly define the responsible agency for
each project, then strictly implement and strictly monitor
and inspect the investments. To do so, the government has
established 24 central inspection groups to avoid any misuse
of funds; thus far, he said no "major violations" of law have
been detected.

Will there Be Another Stimulus?
--------------

9. (U) In response to a foreign journalist's question,
Chairman Zhang said the RMB four trillion fiscal stimulus
package was a dynamic process. Officials need to monitor the

BEIJING 00000589 003 OF 004


economic situation closely to adjust their policies if needed
to prevent a slump in growth. As to whether four trillion
was enough, he said it is too soon to tell.

Monetary Policy: Front-loaded and Forceful
--------------

10. (U) A "Financial Times" reporter asked Governor Zhou to
comment on the course of China's monetary policy over the
past year, from tight in the first half of 2008, to
"moderately easy" in the second half, and then to the record
release of new credit (RMB 1.6 trillion) in January 2009.
Zhou defended the policy changes, taken in response to rapid
changes in the economic environment, and said the current mix
of monetary and fiscal policy measures was working and
starting to bring good effects and upward trends in the data,
with some January 2009 data "above expectations." Zhou said
the State Council early on had determined that China's policy
responses to the global financial crisis should be
front-loaded and forceful; if public confidence collapsed, it
would be too late to act. He said China had learned this
lesson by studying the experience of other countries.

"Targets" are Just "Guidelines"
--------------

11. (U) Noting that new lending through February already
equaled half of the announced RMB five trillion target for
the entire year, a Reuters reporter questioned whether this
would lead to credit shortages later in 2009. In response,
Governor Zhou said the PBOC's target was lending above RMB
five trillion. After many years of economic reform, the
various money supply "targets" no longer are truly "planned"
or compulsory; rather, they are simply guidelines or
intermediate goals. The "final" goals for the PBOC are
prevention of inflation, promotion of economic growth,
generation of employment, and balance of payments stability.
Officials needed to assess monetary policy in light of these
goals. Furthermore, under the impact of the global crisis,
the government needs to remain flexible and not blindly apply
simplistic targets. Finally, he acknowledged that Chinese
banks tend to extend more loans in the first half of each
year, but that does not mean there will be no loans in the
second half.

SMEs Need Help
--------------

12. (U) A China Radio International correspondent asked
Governor Zhou how the PBOC would assist China's small and
medium enterprises (SMEs),and also about the problem of
counterfeit Chinese currency. Zhou said he was aware that
many SMEs have complained about credit difficulties, and the
PBOC had adjusted its policies in the second half of 2008
accordingly. As a result, in 2008 lending to SMEs rose 13.5
percent, and they received 51.9 percent of total lending,
compared to 48 percent for large companies. That said,
however, some problems remain, especially for the smaller
enterprises with low capital levels. Zhou said all banks
need to find ways to assist these companies. For the
counterfeit currency issue, Zhou referred the reporter to a
recent speech by Vice Governor Ma Delun, now posted on the
PBOC website.

Exchange Rate: Rule Out Depreciation?
--------------

13. (U) Asked by a foreign journalist whether he could
clearly rule out a depreciation of the RMB, Governor Zhou
replied that Premier Wen Jiabao clearly stated the previous
day that the RMB exchange rate should be a market-based,
managed floating rate, with reference to a basket of
currencies. The government's goal is to maintain a stable
and balanced equilibrium, and "no further explanation is
necessary." Zhou then added that the global financial crisis
was affecting policies in all sectors, and said "we must
wonder what will happen in the country where the crisis
started." If you can tell me, he told the journalist, then
"we can act preemptively."

Hong Kong: Currency Swap and RMB Settlement
--------------

14. (U) A Hong Kong journalist asked about expansion of Hong
Kong's pilot RMB settlement program and implementation of the
Hong Kong-Mainland currency swap arrangement. Governor Zhou
replied that the settlement pilot program had begun in 2003
and was gradually being expanded. For trade in goods, Zhou
said there were "not many difficulties," as banks simply
needed to add one more currency to their existing multiple

BEIJING 00000589 004 OF 004


currency systems. Regarding the currency swap arrangement
with the Hong Kong Monetary Authority, Zhou said announcement
of the plan was intended to increase public confidence on
both sides of the border and support recovery from the global
financial crisis. It also would be used to deal with any
sudden liquidity problems.

Cross-Strait Banking
--------------

15. (U) A Taiwan journalist, noting recent improvements in
cross-Strait relations, inquired whether specific reciprocal
measures would be taken to further open the banking sectors
in both Taiwan and the Mainland. Governor Zhou agreed that
more improvements in access for banks from both sides were
needed to facilitate deepening economic and financial
cooperation. He cited the development of financial relations
with Hong Kong as a model; initially little cooperation,
followed by gradual expansion to satisfy the demands of the
market.
PICCUTA